On December 23, 2014, in Stockton Mortgage, Inc. v. Tope, the California Court of Appeal for the Third District held that a notice of abatement is not covered as a lien, encumbrance or defect on title under the lender's title insurance policy (No. C071210, (Cal. Ct. App. Dec. 23, 2014)). The court also found that a preliminary title report is merely an offer, not an enforceable contract.

Stockton Management loaned $315,000 to Joshua Prinze, secured by a deed of trust recorded on November 4, 2005. Later that month, Stockton assigned all of its beneficial interest under the deed of trust to investors.

In June 2005, in preparation for issuing a preliminary title report, Alliance wrote to San Joaquin County about a notice of abatement relating to certain building code violations that appeared on the property's title. Alliance requested that the County provide a release of the notice that Alliance could record once the loan closed and escrow funds were applied to cure the violations and pay outstanding enforcement costs to the County. In September, the County replied to Alliance that it could not issue a release until all violations had been cured.

Several days later, Alliance issued a preliminary title report, which included as one of its exceptions the notice of abatement action, along with a statement that Alliance would require a full release prior to issuing a title insurance policy to Stockton at the closing of the loan.

In November 2005, Alliance, underwritten by First American, issued the title insurance policy on the property. There was no mention of the notice of abatement in the policy. Shortly thereafter, Alliance paid the outstanding enforcement costs to the County. The notice of abatement action was not released because the violations remained uncured.

After Prinze defaulted on the loan in 2006, First American denied Stockton's title insurance claim on behalf of itself and the investors who had acquired Stockton's interests in the loan for costs associated with obtaining a release of the notice of abatement action. The investors sued Stockton in June 2009, and Stockton filed instant cross-claims against First American, Alliance and others for failing to provide coverage for the costs associated with curing the violations to release the notice of abatement action and for failing to obtain a release of the notice of abatement before the closing.

The trial court granted summary judgment to First American, and Stockton appealed.

The Appellate Court upheld the trial court's decision in favor of First American. The court held that the notice of abatement action was not covered under the title insurance policy because it was not a lien, defect or encumbrance on title but rather a notice to the owner of a duty to comply with local requirements. The mere possibility that the notice of abatement concerned violations that the County could enforce with a lien on the property was not a defect on title when the policy was given. Even if the accrued enforcement costs under the notice of abatement constituted a defect or lien on title, those costs were fully paid through the escrow, extinguishing any existing lien.

The court also held that the preliminary title report was not an enforceable contract as a matter of law but rather was an offer to issue a title insurance policy. In addition, the final policy's omission of the notice of abatement did not create an obligation for Alliance to obtain a release of the notice even though the notice appeared in the preliminary report.

This case should serve as a reminder to lenders' counsel to carefully review the preliminary title report before closing and accepting a title insurance policy. Lenders should confirm that all items are taken care of before the closing. Even if an item from the title report does not appear in the final lender's policy, it has not necessarily been properly disposed of.